We’re at the point in the series where the rubber meets the road – at least so far as a trading plan is concerned. As a discretionary trader, my plan (rules) serve as a starting point as well as a check and balance for my intuition. If my rules dictate a course of action but ‘I feel as though I’d like to do something else’, it ‘heads up’ time. I check to see if my ‘flight, freeze or fight’ is in gear, or whether there is something my conscious mind is missing.

I mention this because I believe humans deal with subjective probabilities in a different way then when dealing with objective probabilities…i.e. when faced with uncertainty, we are more likely to fall back on our intuition. Anyway, back to the plan.

My first step? I ask three questions:

What is the trend of the timeframe I am trading?

Is it likely to continue or change?

What is today’s bias likely to be – directional (up or down) or rotational?

The answers to the first two questions determines if I’ll be seeking to go long or short; the answer to the last helps identify the likely tactics I’ll be using to enter the position. Let’s take the AUDUSD as an example, my trader’s timeframe is the 18-day swing (monthly trend).

Figure 1 is a chart of the 13-week swing (quarterly trend). My current scenario is we are seeing the final leg of a change in trend triangle. If so:

We should see a throwover to mark the ‘E’ leg.

The minimum target for the ‘E’ leg is 1.0645.

The probable target is 1.0800 to 1.0805

The maximum target (if there is a triangle) is 1.0855.

Since the 13-week swing line direction is up, the 18-day swing trend will be up. At this stage, the trend is likely to continue. Hence I’ll be looking to buy dips so long as my reward:risk ratio is adequate. More next time

Well, we are that point: we’ll be examining the various elements that go into a discretionary trading plan.

Remember our goal is to define when the probabilities favour a trade and when they favour an exit and the plan does this for the timeframe we are trading. For the plan to be effective, it needs to be one that suits our personality. For example, I process information with a visual-kinesthetic process. So, it’s natural that I would migrate to technical analysis augmented by my intuition. Now, Damasio would say that no decision is possible without emotional input, and I would agree. The question is how much input and with what tools. The answer is determined by who we are and how we process info.

OK, let’s now put that issue aside and turn to the next step of a plan.

The market bombards the trader with a tremendous amount of information. To make sense of it, the trader needs to create a framework. Here is where a model like Wyckoff’s or Steidlmayer’s come in – the models structure information in a way as to make enough sense so that the trader can come to a conclusion. Figure 1 again shows the Wyckoff model that sees a trend change from down to up:

After a sustained downtrend, the directional starts to lose momentum.

Finally, we see an end of the move down. This end is characterised either by larger than normal volume or volume that shows divergence with the prior swing low, i.e. the final low has lower volume than the previous swing low.

The market then goes sideways until a breakout occurs (accumulation).

Following the breakout, we see a retest. If the retest is successful we’ll see a markup phase that ends in distribution and a downtrend.

Figure 2 shows the 2009 low and how well the Wyckoff identified the possible low …..More tomorrow.

Today, let’s look at elements of a discretionary trading plan. It’s worth bearing in mind that as traders we create plans to help us determine when the probabilities favour a trade (entry) and when they no longer favour it (exit).

There are many ways to frame a plan – what is important is they suit our personality. For example, Rob Hanna is a swing (Quantifiable Edges) trader using quant methods. His approach could not be more different to mine – yet we both succeed.

[Speaking of Rob, he has a new service, Overnight Edges ‘dedicated to taking advantage of overnight movements’. Looks really interesting – a story for another day].

My approach is based on:

A model to place structure around price action – based mainly on Wyckoff and Market Profile (note the CME is interactive; so, click on the headings to see what they say); and, to a lesser, my re-interpretation of the Elliot Wave (which I call the Ray Wave)

In the preceding posts, I looked at the ‘generic’ factors for trading success. In the next we’ll look at the specific factors, what Dr Elder calls ‘method’ ‘money’ and ‘mind’. I like to use the ‘formula’:

The multiplication sign is important because it highlights that success is a function of the weakest element in the chain. If you fall below the pass mark for any of them, then failure in all of the chain must result. Each of these has its essential elements.

Let’s first look at ‘method’ but before I do that, I’d like to consider the role of ‘context’.

Plans can run the gauntlet from mechanical system to ‘gut’ trading. Figure 1, courtesy of Three Skills of Top Traders, shows Pruden’s view of this range and the relationship with state management. He feels that the mechanical trader is best served with simple rules; moreover, he takes the view that the mechanical trader has the lowest need for state management. While I agree that may be the case for entry, it’s not the case when a mechanical system shifts into drawdown mode: when a system is experiencing loss after loss, the trader needs high state management. But that’s merely an aside – let’s get back to the main point.

I take the view that ‘context’ allows a discretionary trader greater flexibility in selecting low risk trades. As an example. let’s take the current AUDUSD situation:

Figure 2 shows the 12-month swing. We see a possible Triangle Change in Trend Pattern forming. The ‘e’ leg of a Triangle will either fail to reach the trendline or will end a ‘throwover’. If that’s the case, how do we know that the Triangle is complete? The great thing about Triangle completion is the strong impulsive thrusts in the direction of the new trend.

Figure 3 is the 13-week swing chart. We see a possible completion patten on Aug 10. The following week we see a strong thrust down So far all seems well with the TRI CIT scenario. BUT…. last week… the move down slowed. Now it’s true that in another context I’d treat last week’s price action as a bearish bar because:

there was an attempt to rally

that rally failed and

we then saw the market push past the open and close near the lows. But in the TRI CIT context……..we have a problem.

3. The problem is we saw a range and volume for the week that was below normal. In this context, this price action throws doubt on the idea that the Triangle is complete. As a result. if short, I’d be covering the whole position (I did) or at least a substantial part of it.

This is the power of context: the flexibility to determine, within the happening environment, whether a pattern is bullish, bearish or neutral.

The next set of generic skills are the those of planning, executing and reviewing. Another name for planning is goal-setting.

Like ‘thinking’, there is a whole genre of material in the printed pages. Names like ‘Bob Proctor’ and ‘Anthony Robbins’ have created fortunes by delivering material in this field. Just Google and you will see what I mean. The info is out there, you need only have the will to seek, learn and apply.

Goal-setting has its own circular of influence; the best goals are those set when we know:

Our Purpose – the reason we want what we want – and our best purposes are aligned with our values.

Our Mission – the description of what we’ll do for others when we achieve our purpose – a ‘you statement’

Our Vision -a description of what we will have and be when we attain our goals.

The review process is an essential part of our learning and thus our achievement process. The importance of ‘review and correction’ has now been validated by research and enshrined by the ideas of Anders Ericsson. I have written about his ideas in this blog e.g. see “A Better Way to Learn“.

There is one last generic skill I’d like to mention before moving on: managing our finances. It’s all very to plan, execute and review for other areas; but if we don’t learn to manage our finances to the best of our ability. the success we deserve will elude us. And again, we can Google to see what’s out there. For example: Top Ten Books About Money

“Thinking’, ‘Planning’, ‘Executing’ and “Reviewing’ all essential skills in any area of life – not just for trading. In the next set of blogs, I’ll look at the particular skills mainly relevant only to trading. I say ‘mainly’ because there will be some overlap between the generic and specific.

The 3-session presentations will adopt the learning model in which concepts are explained, then an example is shown, and finally you will be asked to design each step of the new material. In this way, you will have at the end of each session, the new wiring that will lead you to your path of greater consistency. With this new wiring, you need only do the homework in preparation for the next session for the wiring to grow and take hold.

Rule 2: The world doesn’t care about your self-esteem. The world will expect you to accomplish something BEFORE you feel good about yourself.

Rule 3: You will NOT make $60,000 a year right out of high school. You won’t be a vice-president with a car phone until you earn both.

Rule 4: If you think your teacher is tough, wait till you get a boss.

Rule 5: Flipping burgers is not beneath your dignity. Your Grandparents had a different word for burger flipping: they called it opportunity.

Rule 6: If you mess up, it’s not your parents’ fault, so don’t whine about your mistakes, learn from them.

Rule 7: Before you were born, your parents weren’t as boring as they are now. They got that way from paying your bills, cleaning your clothes and listening to you talk about how cool you thought you were. So before you save the rain forest from the parasites of your parent’s generation, try delousing the closet in your own room.

Rule 8: Your school may have done away with winners and losers, but life HAS NOT. In some schools, they have abolished failing grades and they’ll give you as MANY TIMES as you want to get the right answer. This doesn’t bear the slightest resemblance to ANYTHING in real life.

Rule 9: Life is not divided into semesters. You don’t get summers off and very few employers are interested in helping you FIND YOURSELF. Do that on your own time.

Rule 10: Television is NOT real life. In real life people actually have to leave the coffee shop and go to jobs.

Rule 2: The world doesn’t care about your self-esteem. The world will expect you to accomplish something BEFORE you feel good about yourself.

Rule 3: You will NOT make $60,000 a year right out of high school. You won’t be a vice-president with a car phone until you earn both.

Rule 4: If you think your teacher is tough, wait till you get a boss.

Rule 5: Flipping burgers is not beneath your dignity. Your Grandparents had a different word for burger flipping: they called it opportunity.

Rule 6: If you mess up, it’s not your parents’ fault, so don’t whine about your mistakes, learn from them.

Rule 7: Before you were born, your parents weren’t as boring as they are now. They got that way from paying your bills, cleaning your clothes and listening to you talk about how cool you thought you were. So before you save the rain forest from the parasites of your parent’s generation, try delousing the closet in your own room.

Rule 8: Your school may have done away with winners and losers, but life HAS NOT. In some schools, they have abolished failing grades and they’ll give you as MANY TIMES as you want to get the right answer. This doesn’t bear the slightest resemblance to ANYTHING in real life.

Rule 9: Life is not divided into semesters. You don’t get summers off and very few employers are interested in helping you FIND YOURSELF. Do that on your own time.

Rule 10: Television is NOT real life. In real life people actually have to leave the coffee shop and go to jobs.